Excerpt from - The Rainforest Book

Excerpt from
Introduction: Our Journey
We knocked on the door and were ushered into a waiting area. At first glance, there was
nothing remarkable about the room. It was a typical office in an emerging city. This one
happened to house a national institute charged with leading innovation development for the
country. We have been to many of these institutes around the world, and they all look about the
same.
But then we saw the wall.
What someone decides to put on a wall is revealing. Walls are aspirational. College
students often decorate their walls with admired musicians, sports cars, or celebrities. Large
companies often hang inspirational posters or modern art.
When you visit many incubators or venture capital firms in Silicon Valley, you see
something unique to that world. You see trophies, but not brass cups or blue ribbons. Instead,
the trophies are the names of the successful startup companies the firm helped grow. Often, you
will see logos like Google, Amazon, Cisco, and others emblazoned proudly―sometimes
arrogantly―on the walls of their entrance rooms. That is what we have come to expect.
In this particular office, however, we saw something that struck us as bizarre. Right
above the place where visitors sit, clearly for everyone to see, were plaques we had never before
seen in such a place:
What was starkly obvious at that moment was how terrible the world is at managing
innovation. To date, there has been no systematic way to measure innovation, change it, or
grow it. The management tool, ISO 9001, was created in the 1980s as a way to certify quality
control for manufacturing processes.1 Borrowed from a different paradigm, it was definitely the
wrong tool for the job.
For all the aspirational talk about innovation by CEOs and Presidents, society still lacks
the right tools to deal with innovation. Like ISO 9001, the best management tools available are
the same ones that automobile manufacturers might use to calibrate the quality of machine
parts. If that is really the best management tool available for innovation, it is no wonder
governments and corporations have such a hard time with it!
Why were we sitting in this room? We call this work Extreme Venture Capital―working
on the fringes of the world’s venture economy to fund the growth and development of
promising startup companies. This work takes us from places as developed as Japan, Taiwan,
‚Selection and Use of the ISO 9000 Family of Standards,‛ International Organization for Standardization, accessed
August 30, 2010, http://www.iso.org/iso/iso_9000_selection_and_use.htm.
1
Scandinavia, and New Zealand, to still emerging regions such as Mexico, Egypt, Kazakhstan,
Colombia, Saudi Arabia, and the Palestinian Territories.
We are atypical venture capitalists. Our practice consists of two interconnected halves.
On one side, we do what many venture capitalists do―we identify and invest in highly
selective technology startup companies, and try to help them grow quickly and profitably,
forming close partnerships with our entrepreneurs. Frequently, we work with scientists who are
building companies from scratch based on their university research. Our chosen startups span a
range of sectors from software to hardware, from biomedicine to bio-agriculture, from
renewable resources to clean water.
On the other side, we take the insights gleaned from our hands-on experience and apply
them to global development by working with governments to develop venture funds, startup
incubators, and technology policy in emerging markets. We have a rare set of proficiencies at
this intersection of private venture and public policy. We have advised dozens of institutions,
such as the World Bank, the U.S. Agency for International Development, and numerous foreign
governments. We have mentored thousands of entrepreneurs and innovators in over 30
countries. This has given us a special vantage point from which to observe some of the most
interesting emerging companies in the world. We have managed organizations―Larta Institute,
CONNECT, and Global CONNECT―that are considered thought leaders in this field. Today,
we run T2 Venture Capital, which is headquartered in Silicon Valley and has offices in San
Diego, North Carolina, Washington, D.C., and Dubai, among other places.
Over decades of combined experience, we have developed a unique field of
expertise―the analysis and fostering of innovation systems. In so doing, we have discovered that
the development of entire innovation systems differs profoundly from the conventional wisdom
for encouraging innovation at the scale of individuals or small teams. …
The Innovation Ecosystem
Excerpt From
Chapter One: What is the Rainforest?
A Tale of Two Cities
It was the best of times, it was the worst of times.
In San Diego, things were booming. Despite the impact of the Great Recession, San
Diego had a well-deserved reputation as a global hotspot for technological innovation. The
region was a sleepy retirement and military community only 25 years ago, but now it was being
hailed as one of the nation’s most productive areas for the creation of new high-growth startup
companies. Over 300 entrepreneurial efforts were being launched each year.2 The city’s startup
companies were raising more venture capital than those of the entire Midwest.3 People were
calling the region the ‚wireless innovation capital of the world.‛ Most of the world’s leading
biopharmaceutical companies―Merck, GlaxoSmithKline, Eli Lilly, Amgen, Biogen Idec, to
name a few―had set up operations in San Diego, primarily to access the steady stream of new
biomedical innovations emerging from the community. The same thing was happening in
software, medical devices, energy technologies, and other sectors fueled by technological
innovation. The University of California at San Diego had a similarly meteoric rise, expanding
its research activities to $960 million in 2011. 4 As the surfers might say, the region was
‚cooking.‛
The explanations, it seemed, were obvious. San Diego was benefitting from policy
changes that had unleashed the forces of free enterprise. Entrepreneurs could take grand ideas
and turn them into realities because American society had lowered the barriers for doing so.
Laws governing real estate, intellectual property, contracts, and corporations were sound and
transparent, and they were easy to enforce. Taxes were low enough to keep entrepreneurs
motivated. A brand new corporation could be setup in minutes and at a low cost. There were
few serious artificial barriers standing in the way of building the Great American Company.
Furthermore, San Diego had a tremendous network of people with deep, relevant
expertise in science, technology, business, law, finance, accounting, and other key areas. This
community of experts created a network of activity in which the best and brightest from around
the world gravitated to the region to work with the people there, which attracted more people
with complementary knowledge and skills, creating a circular, self-generating process that
produced spectacular economic results. What Hollywood had done for entertainment, San
Diego was doing for technology innovation.
CONNECT Innovation Report, Second Quarter 2009.
‚PricewaterhouseCoopers National Venture Capital Association MoneyTree Report,‛ PricewaterhouseCoopers,
accessed August 30, 2011,
https://www.pwcmoneytree.com/MTPublic/ns/index.jsp.
San Diego startups during 2001-2010 raised $11.4 billion. Midwest startups during 2001-2010 raised $10.6 billion.
4 Paul K. Mueller, ‚UC San Diego 2011 Research Funding Reaches Near-Record $960 Million,‛ UC San Diego News
Center, August 16, 2011,
http://ucsdnews.ucsd.edu/newsrel/awards/20110816RecordFunding.asp.
2
3
In Chicago, however, it was the worst of times. True, there were a few unusual
companies, such as the marketing wonder Groupon, but those sparks seemed like one-offs.
They were not igniting the same kind of a system-wide transformation in the region that San
Diego was experiencing. The experts were perplexed. Chicago had many of the same
ingredients for technological innovation and entrepreneurial success. The city had almost
exactly the same legal and business structures that San Diego had.
The region’s educational institutions spawned a natural supply of raw talent and
expertise. Two of the leading universities in the world―the University of Chicago and
Northwestern University―were located a short distance from downtown, but little of their
science was being translated into innovative commercial products. Nor could this lack of
‘technology transfer’ be attributed to disinterest on the part of the institutions. The University of
Chicago―a school that counted 85 Nobel laureates as past or present teachers, students, or
researchers―was actively seeking to accelerate the commercialization of its scientific
discoveries.
Chicago had become one of the nation’s most robust financial capitals, with massive
hedge funds and the world’s largest options exchange, but little of that money was flowing to
entrepreneurial startups in the region. There were a number of major technology corporations
already in the area―Baxter, Motorola, Alcatel Lucent, and Boeing among them―but they were
not considered active participants in the commercialization of new technologies there. People
had even dubbed the region the ‘Silicon Prairie’ to express their aspirations for it to become the
American Midwest’s leading hub for innovation.
Despite its infrastructure, institutions, expertise, capital, and grand aspirations,
however, the metropolitan region of Chicago was seeing a trickle of technology startups
compared to San Diego’s flood, and those startups were having a hard time growing into
sustainable companies. How do we explain the difference? The two reasons people most
commonly cited to explain San Diego’s success―the power of the American free enterprise
system and the region’s concentration of talent and expertise―could just as easily be said about
Chicago, if not more so. Unfortunately, the conventional answers fail to explain the perplexing
divergence of these two cities. San Diego had turned into a highly productive system of
innovative activity―a Rainforest. Chicago had not.
Chicago is not alone. Today, the rest of America’s industrial and agricultural heartland,
not to mention the rest of the world, is essentially confronting the same challenge. Most of the
world wants to be a Rainforest, but can’t figure out how.
We are left with a great mystery. Like the biological riddles buried in the rainforests of
the Amazon, this mystery does not easily reveal its secrets. But like scientists toiling in the
jungles over many years, we believe we have uncovered some of the answers behind this
puzzling mystery of innovation. …
To learn more about The Rainforest,
Visit www.therainforestbook.com.
Available on Amazon, Kindle, Nook, iBooks